Question

A firm is evaluating a project that will increase annual cash sales by $145,000 and increase annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. The applicable tax rate is 32 percent and the required rate of return is 10%. Compute the Net Present Value of the Project.

$27,826

$43,480

$63,920

$29,920

Answer 1

Answer. $27,826

Cashflow at t0 = -110,000. Depreciation costs over t1 to t4 = 110,000/4 = $27,500

At t=1, Sales = 145,000 Annual Costs = $94,000, Depreciation = $27,500.

Pretax Cashflow = 145,000 - 94,000 - 27,500 = $23,500

Post tax cashflow = $23,500 * (1 - 32%) = $15,980

Operating Cashflow = $15,980 + $27,500 = $43,480 (Adding back depreciation since it is non-cash expense)

Therefore cashflows will look like:

t0 -110,000

t1 43,480

t2 43,480

t3 43,480

t4 43,480

NPV = $27.826